Australian Government Walks Fine Budget Line With RBA Primed to Hike
Kanebridge News
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Australian Government Walks Fine Budget Line With RBA Primed to Hike

The budget is being framed ahead of a federal election expected to be held in early 2025

By JAMES GLYNN
Sun, May 12, 2024 7:00amGrey Clock 2 min

SYDNEY—Australian Treasurer Jim Chalmers will deliver the government’s 2024-2025 federal budget next Tuesday amid concerns that strong revenue growth will tempt him toward a jump in spending, stoking the case for higher interest rates.

Economists expect Chalmers to announce a budget surplus for 2023-2024, supported in part by high commodity prices and strength in the job market, with unemployment continuing to hover near its lowest level in half a century.

The question on the lips of the governor of the Reserve Bank of Australia, Michele Bullock , will be how much of that revenue will flow back into the economy by things like added measures aimed at easing a cost-of-living surge for consumers.

Bullock told reporters Tuesday that the RBA’s board had considered a further rise in interest rates, sending a shot across the bow of the center-left Labor government ahead of the budget.

The budget is being framed ahead of a federal election expected to be held in early 2025.

The public acknowledgment of the RBA board’s discussion of what would be a 14th interest-rate rise in two years signaled that the central bank has grown more concerned about the inflation outlook after first-quarter data came in above its own expectations.

Economists have warned that the RBA isn’t even close to a decision to cut interest rates, and the more likely outcome at the moment is that the central bank will need to tighten the policy screws further before the end of this year.

“The challenge fiscal policymakers face is that although they are flush with revenue, a cautious approach ought to be taken to additional spending because the economy is still operating at full employment, and inflation is still too high,” said Paul Bloxham, chief economist at HSBC Australia.

“Loosening fiscal policy settings at this point could mean that monetary policy would need to be tightened further yet—or that rates need to be higher for longer,” he added.

The RBA is conscious of the fact that significant income tax cuts will be delivered midyear and that they target low- and middle-income earners, who are more likely to spend added income than save it.

The government has already signalled its plans to spend in the area of subsidies for local manufacturing, including for the production of solar panels.

In addition, the budget will focus on business tax incentives, increased defence spending, funding for domestic violence support, changes to student debt policy and infrastructure.

Chalmers has played down the risk over the budget stoking the flames of inflation.

“It will be a responsible budget, a restrained budget, and it will maintain our focus on that inflation fight,” he said Thursday in a radio interview.

“There will be help for people with the cost of living, but we’ll make sure that that cost-of-living help is part of the solution and not part of the problem when it comes to inflation,” he added.

A risk that the RBA will also be alert to is the probability that the government will hold back some of its revenue gains to support added spending closer to the election.

Josh Williamson , chief economist at Citi Australia, said Chalmers will likely push new spending into the future to avoid overheating the economy now.

“The government does not want to be seen promoting policies that add to the risk of further policy tightening,” he said.

This suggests that new spending will be pushed into the government’s forward budgetary projections, while measures that directly reduce inflation could be announced virtually immediately, Williamson added.



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The sticky economic factor making an interest rate drop unlikely this year

It’s a key indicator in the RBA board’s decision making process, but it is proving difficult to move in the right direction

By Bronwyn Allen
Thu, May 30, 2024 2 min

The consumer price index (CPI) rose in April to an annual rate of 3.6 percent, which was 0.1 percent higher than in March, raising doubts about an interest rate cut this year as inflation starts looking stickier than expected. This is the second consecutive month of small rises, potentially indicating that Australia is experiencing the same stalled progress in bringing inflation down that is being seen in the United States, as both nations approach their central banks’ target inflation bands.

In Australia, the target inflation band is 2 to 3 percent, with the Reserve Bank of Australia (RBA) aiming to achieve the midpoint under its new agreement with the Federal Government following a formal review. In its interest rate decision-making, the RBA does not give as much weight to the monthly inflation data because not all prices are measured like they are in the quarterly data. On a quarterly basis, inflation has continued to fall. In the March quarter, the annual rate of inflation was 3.6 percent, down from 4.1 percent in December, according to the Australian Bureau of Statistics (ABS).

CBA economist Stephen Wu noted the April data was above the bank’s forecast of 3.5 percent as well as the industrywide consensus forecast of 3.4 percent. He predicts the next leg down in inflation won’t be until the September quarter, when we will see the effects of electricity rebates and a likely smaller minimum wage increase to be announced by the Fair Work Commission next month compared to June 2023.

The most significant contributor to the April inflation rise were housing costs, which rose 4.9 percent on an annual basis. This reflects a continuing rise in weekly rents amid near-record low vacancy rates across the country, as well as significantly higher labour and materials costs which builders are passing on to the buyers of new homes, as well as renovators.

The second biggest contributor was food and non-alcoholic beverages, up 3.8 percent annually, reflecting higher prices for fruit and vegetables in April. The ABS said unfavourable weather led to a reduced supply of berries, bananas and vegetables such as broccoli. The annual rate of inflation for alcohol and tobacco rose by 6.5 percent, and transport rose by 4.2 percent due to higher fuel prices.

Robert Carnell, the Asia Pacific head of research at ING, said they no longer expect a rate cut this year after seeing the April data. Mr Carnell said an increase in trend inflation was apparent and “rate cuts this year look unlikely”. In the RBA’s latest monetary policy statement, published before the April CPI was released, it said: “Inflation is expected to be higher in the near term than previously thought due to the stronger labour market and higher petrol prices. But inflation is still expected to return to the target range in the second half of 2025 and to reach the midpoint in 2026.”

 

MOST POPULAR
11 ACRES ROAD, KELLYVILLE, NSW

This stylish family home combines a classic palette and finishes with a flexible floorplan

35 North Street Windsor

Just 55 minutes from Sydney, make this your creative getaway located in the majestic Hawkesbury region.

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